There has been significant coverage recently by national and trade press into the question of pay in the hospitality and leisure sector. Are workers getting paid at least the national minimum wage? Should they be paid the living wage instead? How high does the government intend to take the national minimum wage? Are workers getting the tips they deserve?

The hospitality sector is currently debating the merits of a rise in the national minimum wage (NMW) for apprentices and under 25s. From October 2015 the NMW is to rise to £6.70 an hour for 21 to 24 year olds and to £3.30 an hour for apprentices. It has been noted by trade associations that an increase in the lower NMW rates must inevitably result in an increase in pay for those paid above the NMW in order to maintain a differential between workers of different seniority.

As a consequence there is a balance to be struck between the sustainability of a business having to pay increased wages it cannot potentially afford versus improving staff retention with higher wage rates attracting and retaining quality staff. The recent announcement by Lidl that it will be setting its minimum wage against the aspirational living wage will only help to take workers away from the hospitality and leisure industry, unless it too can begin to set such basic standards.

Perhaps as a consequence of higher NMW rates, or difficult trading conditions, there have been recent reports of some hospitality businesses using tips to create a higher wage rate, or not even passing the tips onto their staff. As a consequence the Business Secretary, Sajid Javid is now investigating whether there is an abuse by some of the trade not passing on tips fairly to their workers. The British Hospitality Association recently provided some additional guidance on discretionary tips and services charges.

So what are the legal requirements?

National Minimum Wage

The NMW is a specified minimum hourly rate of pay to which most workers in the UK over school leaving age are entitled. All employers are obliged to pay the NMW, irrespective of their size. The current standard adult rate is £6.50 an hour set to rise to £6.70 an hour in October 2015. In addition in the July 2015 Budget, the government announced that it would introduce a premium, over and above the NMW, for workers aged 25 and over to be known as the National living wage. The government will set the first premium in April 2016 at 50p resulting in a higher NMW of £7.20 for older workers.

A workers average hourly rate is used to determine whether a worker has received the NMW. This is calculated on the basis of: 

  • The total remuneration earned over the relevant pay reference period;
  • Divided by the total number of hours worked over the pay reference period.

The pay reference period is the period used for calculating hourly pay. It must be a period of one month or shorter. For example workers paid daily will have a pay reference period of one day and workers paid weekly will have a pay reference period of one week etc.

For NMW purposes, the pay allocated to a pay reference period is any pay either:

  • Received during that period.
  • Earned in that period but not received until the next pay reference period.

For example, if a worker earns commission towards the end of the current pay reference period, it may not be possible to calculate their earnings in time to be included in their pay for that period. If the employer pays it to them in the next pay reference period, the money will still count towards the period they earned it in. In relation to bonus payments, most of an annual bonus received in a pay reference period will count towards the NMW pay received in that period. However, a proportion of the bonus, based on an employer's pay reference period, can count towards pay received in the previous pay reference period. For example, where an annual bonus is paid in December and the pay reference period is one month, one-twelfth of the bonus can count towards NMW pay in November. The rest of the bonus counts towards NMW pay in December.

Tips, service charges and gratuities

Before 1 October 2009, tips, service charges and gratuities "paid by the employer" through its payroll could be taken into account when calculating whether an employee had received the NMW. They could not be taken into account where:

  • They were paid by customers directly to the workers.
  • They were paid to a troncmaster (for example, the head waiter in a restaurant) who then distributed them to the workers. This applied even if received by the employer, and then transferred to a troncmaster's bank account before being distributed by the troncmaster to employees participating in tronc agreements, as the Courts decided these were not "paid by the employer" to the employees for the purposes of the NMW Regulations.

Since 1 October 2009, employers have not been able to take account of tips, gratuities and service charges when deciding if a worker has received the NMW. This is the case even if the money is paid by the employer, representing amounts paid by customers.

Accommodation allowance

The policy behind the NMW legislation is that workers should receive the NMW in the form of cash, rather than benefits in kind. Therefore, the value of most benefits in kind will not count towards the NMW. The only non-cash benefit provided to the worker that should be taken into account is the value of any accommodation provided by the employer. This is the number of days in the reference period for which accommodation was provided multiplied by the applicable accommodation allowance for that year. Currently the allowance is a daily rate of £5.08 rising to £5.35 from the 1st of October 2015.

Where accommodation is provided as a benefit in kind (that is, without charge by the employer), the employer can add an amount equal to the accommodation allowance onto the total remuneration when calculating pay for NMW purposes.

Where accommodation is not provided as a benefit in kind, but the worker pays rent to the employer (whether or not deducted directly from wages), any rent up to the value of the accommodation allowance can be disregarded, but any excess will be treated as a deduction so as to reduce the pay for NMW purposes.

In the case of Leisure Employment Services Ltd against the Commissioners for HM Revenue and Customs in 2007 the Court of Appeal confirmed that the accommodation allowance covered not only the accommodation itself but any services provided in connection with the accommodation, such as gas and electricity. Therefore, an employer that was paying its employees the minimum wage, having already made full use of the accommodation off-set, was not entitled to levy a further charge of £6 per fortnight for gas and electricity, even though this was less than the workers would have had to pay to purchase the utilities direct from the supplier.

It is critical that the minimum legal requirements are met, as the consequences of getting it wrong can be significant, both as to cost and to reputation.